This chapter briefly focuses on the issue of interest in Middle Eastern countries and the evolution and effect of this issue on the current laws of those countries, as well as the legality or illegality of certain categories of contracts that raise issues related to Riba (usury) 1 in the technical sense.

Riba (usury)

Islamic law encourages commercial activities that are conducted among honest parties and do not violate the principles of Sharia. Islamic law condemns profits made by illegal or immoral means. This has resulted in the Islamic law's prohibition of usury in contracts. This issue is usually 2referred to as Riba.

Islamic Sharia law believes that usury - Riba - is enrichment without justification, which upsets the balance of reciprocal benefits. Islamic scholars have defined Riba as "a monetary advantage without equivalent counterpart which has been stipulated in favor of one of the contracting parties on the exchange of valuables of a monetary type". 3

As some scholars have indicated: "Riba always implies a transaction which presupposes an exchange where the equivalent of the benefits was not respected. This upsets the balance of the reciprocal obligations of the parties, and consequently the economic basis of the contract is upset." Under Islamic law, Riba means obtaining a gain without an equivalent return, which amounts to enrichment without justification. 4[Page203:]

To sum up, the Riba prohibited by the Quran is any profit that is not obtained in a proper manner and does not represent any work but only an unwarranted gain due to luck or delay, like dramatically increasing the sum due from a debtor. As explained above, Riba is an unbalanced exchange of goods or money. If the money or goods exchanged are of the same amount or of an identical nature, then the goods or money exchanged should be exactly the same.

Certain Islamic scholars have tried to apply the prohibition on Riba strictly, but others extend the application of the prohibition not only to loans with interest but also to every kind of debt and benefit in the form of money or goods due from one person to an other.

It is important to note that Riba as explained above does not prohibit all increase or profit or gain. This fact is confirmed by Quranic verse: "But God has permitted sale and forbidden usury." 5

This extension of the prohibition of Riba to interest has resulted in problems covering a variety of commercial activities in the Arab world.

In the next couple of paragraphs, I will try to show how Arab countries in the Middle East have dealt with this issue.

In accordance with Islamic law, every contract including Riba is fasid, i.e. invalid or vitiated. 6

The prohibition of Riba has been interpreted by some scholars to include any interest resulting from extending credit and any banking operation or any trading of any type that includes payment of interest. Some have gone so far as to say that the theory of Riba are no longer limited to loans at interest but also extend to include all benefits in the form of sums of money or articles owed by one person to another and giving rise to profit for one of the parties without a corresponding advantage for the other. 7

Certain Arab countries, such as the United Arab Emirates, Egypt, Syria, Iraq, Oman, Libya, Lebanon and Kuwait, have for a long time allowed the allocation of interest. The civil and commercial codes of these countries are influenced by Western legal theories. The codes introduced in these countries allow interest in trading and banking operations. [Page204:]

Therefore, if the applicable law in an arbitration is the law of one of said countries, a Western lawyer is not expected to face major problems in dealing with the issue of interest.

Article 226 of the Egyptian Civil Code allows interest on loans. In civil matters, the interest rate is 4% annually. In commercial matters, the interest rate is 5% annually, as compensation for the delay in repaying the money from the date of the judicial demand or according to the date determined by commercial custom or the parties' agreement. Article 227 of the Egyptian Civil Code allows the parties to agree to an interest rate of no more than 7%.8 Furthermore, in certain commercial matters, Article 50 of the new Egyptian Commercial Code, enacted on May 17, 1999, allows a rate of interest equivalent to the interest rate declared by the Egyptian Central Bank, which currently stands at approximately 10% per annum.

In Articles 227 and 228, the Syrian Civil Code allows interest in a similar fashion as the Egyptian Civil Code, with the sole exception that the parties can agree to an annual interest rate of up to 9% annually. 9

In Articles 227 and 228, the Libyan Civil Code, as initially promulgated by the Kingdom, allows for interest in a similar fashion as the Egyptian Civil Code, with the sole exception that the parties can agree to an annual interest rate of up to 10% annually. 10

It is interesting that Arab countries that allow the application of interest in the case of a delay in repayment of amounts owed do not require the creditor to show any actual damages as a result of said delay. In accordance with the different Arab Civil Codes, the interest starts accruing under certain conditions, 11 including:

(i) There must be an obligation to pay an amount of money such as a loan, rent or a financial due.

(ii)The monetary obligation on which interest will start accruing could result from a contractual obligation or a statutory obligation, such as an obligation to pay alimony.

(iii) The monetary obligation should be specifically known and quantified at the time of demand. The issue is left to the judge to evaluate at the time of litigation, thus allowing interest on compensation demanded for contractual reasons or for an illicit act (delictual liability). [Page205:]

(iv) For interest to start accruing on the monetary obligations, there must either be a judicial demand for the principal debt in addition to interest, or the parties must have agreed on a specific date, or commercial custom dictates a specific date, or the law mentions another date. In the case of contradiction between custom and the agreement of the parties, the agreement of the parties prevails.

The Arab countries that allow interest all have a ceiling on such interest, such as 7% in Egypt, 9% in Syria and 10% in Libya. If the parties agree on a higher interest rate, this is considered a violation of public order and the penalty for such a violation is that the interest rate is reduced to the maximum allowed under the legal interest rate. 12

Civil law in the Arab countries that allow the application of interest does not allow compound interest but allows simple interest that does not exceed the amount of the principal, provided there a no commercial customs or rules indicating otherwise and allowing compound interest and/or interest exceeding the principal, such as the case in bank loans and overdrafts. 13

On the other hand, certain other Arab countries such as Saudi Arabia still prohibit interest, which they regard as a prohibited kind of Riba, and there are ongoing efforts to tailor financial transactions in such a way as not to violate this prohibition of interest.

Some types of banking operations are prohibited as a result of this strict interpretation of Riba in Saudi Arabia, such as:

(i) bank loans;

(ii) advances on account;

(iii) discount bills of exchange;

(iv) transfers of commercial claims for collection; and

(v) documentary credits. [Page206:]

Alternative banking techniques were conceived in order to conform to the prohibition of interest by Sharia law, including:

1. Mudarabat partnership in commendam - one partner financing but not active);

2. Musharakat partnership or association);

3. Murabahat (resale with agreed margin of profit, contract between two or more persons trading with joint capital, dividing profit or loss according to agreement);

4. Ijara (lease agreement); and

5. Ijarat wa iqtina (lease purchase agreement).

1. Mudarabat14

Mudarabat is a contract of partnership between at least two parties, with one or more providing finance or capital but not active and the other party providing skills - active - with the agreement that they share the profits. 15

According to Islamic banks, Mudarabat is an agreement under which the bank advances money to be utilized in a specific project in return for a prearranged percentage in the case of profits. Needless to say, there is a certain amount of risk for the bank, because if there are losses there will be no profit distribution. This also requires the bank to make sure that it is undertaking Mudarabat with persons who have the ability and skill to successfully run projects. Due to that risk, the bank in some cases acts as an intermediary - i.e. a paid agent - for putting the parties together in a Mudarabat agreement.

2. Musharakat16

Musharakat is a partnership in which two or more parties participate, sharing the losses and gains between them. Normally, the share of profits or losses is similar to the percentage of ownership in the capital. In Musharakat, all parties participate actively in the management of the project. There is a certain element of risk that the project may suffer losses instead of profits, and the choice of partners is accordingly very important. 17[Page207:]

3. Murabahat18

Murabahat is a system commonly used by Islamic banks whereby the bank agrees to finance the purchase of certain goods, equipment, spare parts, commodities and so forth that are needed by the client and then resells them to the client at an agreed margin of profit on the original cost. In other words, this transaction can be described as a promise of sale by the bank for an agreed margin with regard to specific goods required by the client of the bank. 19

4. Ijar20

In the system of Ijar, the client needs certain equipment or property, the bank buys said equipment or property and then rents it to the client in exchange for rent or periodical payments. The property or equipment is under the control and disposal of the client, who therefore bears the risk of loss as well as paying the rent. In some cases, Ijar includes the possibility - not the obligation - that the client may have the option to buy the equipment or property at the end of the lease. Needless to say, the element of risk in this type of transaction is greatly reduced. 21

5. Ijaratwa Iqtina22

Ijarat wa iqtina is a system whereby the Islamic bank finances the acquisition of material in its own name and then rents this material to the client in return for regular, prearranged instalments that are paid into a joint account.

These instalments include a fee for the bank for undertaking this activity. After all instalments are paid, the material becomes the property of the client. Under this type of transaction - unlike in the case of Ijar - the client is obliged to buy whatever he has previously rented. 23

Conclusion

To conclude, interest is allowed in most countries of the Middle East, with the exception of Saudi Arabia, where the Islamic banking system has established certain alternative techniques that enable it to play an important role in the different economies of the Middle East without violating Islamic Sharia law as interpreted in Saudi Arabia. [Page208:]

Arab countries that allow interest only allow simple interest that does not exceed the amount of the principal and does not require the creditor to show actual damages as a result of the delay in repayment of the amount owed. [Page209:]

1
Although the term Riba is always translated into English as "usury" or "interest", it also encompasses the concepts of "increase" or "gain" under Sharia law.

2
On the issue of interest in Arab countries, see generally Nayla Comair-Obeid, The Law of Business Contracts in the Middle East (Kluwer Law International, 1996) pp. 40-64.

3
On the issue of interest in Arab countries, see generally Nabil Salah, Unlawful Gain and Legitimate Profit in Islamic Law (Graham and Trotman, 1992) pp. 11-60.

4
Comair-Obeid, supra note 2, at p. 44.

5
Salah, supra note 3, at p. 17.

6
Comair-Obeid, supra note 2, at p. 45.

7
Ibid., at p. 53.

8
On the issue of interest and related matters in Egyptian civil law, see generally the work of a great Egyptian authority on Egyptian civil law, Abd al Razzak El Sanhuri, El Wassit Fi Shareh El Kannon El Madani (Dar El Maaraf, Alexandria, 2004) pp. 824-864.

9
Ibid., at p. 826.

10
Ibid., at p. 826.

11
Ibid., at pp. 828-831.

12
Ibid., at pp. 843-845.

13
Ibid., at pp. 857-864.

14
Comair-Obeid, supra note 2, at pp. 179-180.

15
Salah, supra note 3, at pp. 131-143.

16
Comair-Obeid, supra note 2, at p. 181.

17
Salah, supra note 3, at pp. 113-117.

18
Comair-Obeid, supra note 2, at pp. 182-183.

19
Salah, supra note 3, at pp. 117-120.

20
Comair-Obeid, supra note 2, at p. 183.

21
Salah, supra note 3, at p. 120.

22
Comair-Obeid, supra note 2, at p. 184.

23
Salah, supra note 3, at p. 122.